Washington, Feb 20: Noting that India’s growth has slowed markedly and inflation remains stubbornly high, the International Monetary Fund has suggested broader structural reforms to revive growth and raising the long-term growth potential.
“The principal risk facing India is the inward spillover from global financial market volatility,” the IMF said in a report released Thursday after the annual Article IV Consultation with India to monitor its economic health.
“Protracted economic and financial volatility, triggered by advanced economies’ exit from unconventional monetary policies, a lengthy euro area growth slowdown, and higher oil prices are the main external risks,” it said.
Slow progress on structural reforms, high inflation, failure to ease supply constraints, and resorting to expansionary fiscal policy are key domestic downside risks, it said.
“On the upside, going beyond announced reforms or faster-than-envisaged legislative progress would lead to higher growth and reduce economic vulnerabilities,” IMF said.
Executive directors of the 188-member international institution also “commended the Indian authorities for their ability to maintain macroeconomic and financial stability amid a challenging macroeconomic landscape”.
The IMF directors welcomed “ongoing efforts, including recent policy initiatives, to reduce external vulnerabilities, rebuild buffers, and revive investment”.
They noted, however, that “growth has slowed markedly and inflation remains persistently high, while spillovers from global financial market volatility continue to pose a significant risk”.
Against this backdrop, IMF “underscored the need to rein in inflation, prudently consolidate the fiscal position, and accelerate structural reforms to address supply bottlenecks and promote sustainable and inclusive growth”.
IMF also supported the Reserve Bank of India’s policies of rupee flexibility and limited foreign exchange intervention.
IMF also welcomed the gradual, cautious move toward further external liberalisation and suggested that measures to facilitate foreign direct investment inflows and deepen domestic capital markets should continue to help reduce external vulnerabilities.
Given entrenched double-digit inflation expectations, IMF recommended that the authorities maintain the monetary policy stance appropriately tight, and stand ready to raise the policy rate further so as to bring down inflation to more sustainable levels.
Commending the Indian government’s commitment to fiscal consolidation, IMF emphasised on the need for a comprehensive package of measures, comprising both tax and subsidy reforms, to ensure the quality and sustainability of consolidation.
“Rationalising fuel and fertiliser subsidies and introducing the goods and services tax are essential to create fiscal space, while safeguarding priority capital spending and targeted social programmes, particularly health and education,” it said.
IMF stressed that reviving growth and raising the long-term growth potential require broader structural reforms to improve infrastructure, the business climate, and the pricing and allocation of natural resources.
It also saw as key priorities reforms aimed at boosting agricultural productivity and supporting formal job creation, by relaxing labour laws and addressing skills mismatches.
Welcoming recent measures to enhance supervision and increase bank provisioning, IMF said along with improving external conditions, positive policy steps taken by the authorities have improved market sentiment.
“While recent policy initiatives have reduced vulnerabilities, the policy space remains strictly circumscribed because of high deficits and debt, and elevated inflation,” it said.
Projecting India’s growth at 4.6 percent for fiscal year 2013-14, IMF said it should pick up to 5.4 percent in 2014-15 at factor cost.
“Stronger global growth, improving export competitiveness, a favourable monsoon, and a confidence boost from recent policy actions should deliver a modest growth rebound,” it said.
However, fiscal restraint and a tighter monetary stance would act as headwinds, slowing the recovery, IMF staff report said.
(Arun Kumar can be contacted at firstname.lastname@example.org)